Synopsis

Series editor Andrew Leckey and guest editor Ken Auletta have scoured the print media, consulted with the editors of major business and general interest publications, and surveyed journalism school deans to find the best business stories from the last twelve months. Among those selected: Michael Lewis on teenage stock trader Jonathan Lebed, from The New York Times Magazine; James B. Stewart on the irrepressible Michael Milken, from The New Yorker; and many others from the pages of The Wall Street Journal, Rolling Stone, Fortune, Rocky Mountain News, and Wired.

The second annual edition continues the excellence and comprehensive range of this fascinating anthology series.

Excerpt

An entire city of confident Procter & Gamble shareholders was aghast when this supposedly defensive investment took an unexpected, dramatic tumble. Geri Willis of SmartMoney magazine, well-versed in how pervasive P&G is in its headquarters city, puts into human terms the financial loss and accompanying sense of betrayal felt by retirees and employees.

Gerri Willis

The Stock that Ate Cincinnati

If anything, Don Apking thought he might be erring on the side of caution. After all, the Procter & Gamble retiree is young-just 62-and along with his wife, a retired schoolteacher, he intends to enjoy a nice long retirement. That means he's going to need some real growth from his investments-the kind of growth that, for many investors, means tech stocks. But still, his Cisco Systems stake made him nervous. The stock had more than doubled in the past year. Its rich valuation made it vulnerable to any bad news.

His simple solution: He'd sell his shares of Cisco at $110 and put the proceeds into Procter & Gamble. True, that'd make him a little heavy in P&G stock. Its shares would represent a full 25 percent of his holdings. But the stock had been a strong performer for him over the 35 years he worked for the consumer-products giant, and better yet, it looked like a bargain, as its shares had recently slipped to $99 from an all-time high of $118. "Procter had been great," he says. "It had always been very stable."

But not this time. On the afternoon of March 7, less than two months after he dumped his Cisco stake, Apking came home from a round of golf and flipped on CNBC. What he saw nearly knocked him over. Procter & Gamble's stock had positively cratered. It had tumbled to $57, a fall of 35 percent from the previous day's close-and a decline of 52 percent from its high.

At first, says Apking, "I thought it was a typographical error." But then the reality began to sink in: It was no mistake. He was looking at a loss of seven figures. As Apking listened to the official explanation-there had been a surprise earnings warning, sparked by higher energy and material costs, inventory problems in Europe, increased competition abroad-he could feel his blood boiling. "That's B.S.," he says. "There is no way management should have been surprised. I would have fired the CFO the next day. Someone's head has to roll."

Rage against Procter & Gamble is something a lot of people are feeling right now. The stock was supposed to be a bulwark against the onslaught of crazy dot-com valuations, a defensive stock you could count on in good times and bad. Just the day before the earnings surprise, J.P. Morgan's U.S. equity strategist, Douglas Cliggott, had touted P&G shares in a report titled "Buy Some Staples, Sell Some Tech." And Money magazine, which had recommended P&G last year, cited a Banc of America Securities analyst and reassuringly wrote that "current shareholders can let their stomachs settle" in its March issue-just before the plunge.

In fact, P&G's stunning reversal came as a shock to even the most experienced Wall Street prognosticators. "Everyone got caught with their pants down," says First Call's Joe Cooper. Professional investors, among them Kemper Growth portfolio manager Valerie Malter, were quick to punish the stock. The earnings warning was the last straw for Malter, who sold a significant part of her fund's stake that morning. "Companies with a focused strategy, good management, and good fundamentals don't blow up," she says. "Companies shouldn't make promises they can't deliver on."

The Procter & Gamble meltdown is a stark reminder that no stock is totally "safe," especially in a market like this one. Indeed, things are so high-strung, in the wake of the Internet correction and concerns about inflation, that even a slight earnings disappointment can translate into a massive selloff. The message for investors should be clear: diversify. Keeping a high percentage of your portfolio in any stock, or in any sector, is riskier now than ever. "We all take shortcuts in our thinking," says Ron Meier, a professor at the College for Financial Planning in Greenwood Village, Colorado, which trains certified financial advisers. "You say, 'I don't have to look at the financials, it's a big company, it pays a dividend and it's not a dot-com.' It seems safer. But there is no such thing as a safe stock."

Nowhere is the pain over Procter's misfortune being felt more severely than in Cincinnati. With a payroll of 15,000, P&G is the biggest private employer in town. (Worldwide, it employs 110,000.) Thousands more Procter retirees live in the area. And because those two groups together hold 20 percent of the company's stock, its blowup-from which it has since come back only 16.7 percent-has shaken the city's very foundations. Some even wonder if the stock's collapse might signal the start of a local recession.

When news of P&G's monumental fall first ripped through town, Cincinnati financial planner Michael Chasnoff fielded one panicked call after another: When would the stock come back? Should I sell? Why did this happen? For Chasnoff-who has spent much of his career advising his clients to diversify their portfolios, to not put so much into Procter stock-it didn't feel good to be right.

"Most of these people have 100 percent of their retirement money in P&G stock," he says. "The most recent decline was a reality check for a lot of employees. Now they realize that no investment is safe from a market decline."

Blame Procter's rigid retirement plan for much of the problem. That's because it requires workers to hold at least half of their money in P&G stock. There are no other stock investment options available, only a money-market fund, a bond fund, and an annuity. And the voluntary plan for retirees, Retirement Plus, has the same minimum Procter investment requirement: 50 percent. As it turned out, the retirement plan-a generous profit-sharing trust that has turned scores of workers into millionaires-became the so-called Proctoids' own worst enemy. (In typically efficient Procter style, the company reaped $46.8 million in tax savings from the plan last year.)

At the March monthly get-together of P&G retirees held at the Wigwam restaurant, no one could stop talking about the stock plunge. "People were extremely disturbed," says Robert G. Laughlin, 69, a Procter research chemist for 43 years until his retirement last October. "They were critical of [CEO Durk] Jager. These people weren't pleased with how upper management dealt with the press."

In the aftermath, shareholders from around the country have filed six separate lawsuits in U.S. District Court in Cincinnati. At stake is whether P&G broke securities laws by concealing adverse information about the company, misleading investors who bought the stock. They cite a January 26 press release from the company stating that management was "comfortable with the current range of analysts' estimates for fiscal year earnings" and upbeat comments from Procter CFO Clayton Daley at a March 1 consumer products conference hosted by Merrill Lynch.

"The CFO was saying how rosy everything looked," says John Halebian, one of the lawyers representing shareholders. "That guy should never have been that positive. You don't go out making statements that aren't true." P&G declines to comment on the lawsuits other than to say they are "without merit."

Don Apking disagrees. In fact, he's signed on to one of them. "As investors, we were misled," he says. "It was a tragedy."

When Ludmilla Tenkman's father retired from Procter & Gamble years ago, her mother took her aside and begged her never to sell the P&G stock she would someday inherit. "My mom and dad would never have dreamed of selling it," says Tenkman, 78. "Everybody said Procter stock was your lifeline." At its peak earlier this year, her stake was worth $1.6 million. She and her husband used the dividends to finance vacations or to help her children out with college fees, only occasionally selling small stakes. A few years ago, the two started giving away some of the stock to their five children and their spouses.

But when Tenkman's husband died last October, her household income took a dive. Tenkman went to see Michael Chasnoff, who told her she needed to diversify her holdings by selling off as much as 75 percent of her Procter stake. Tenkman's eldest daughter, Martha, and her husband were wary of this advice. It sounded too aggressive, too risky.

While the family was debating what to do, Procter's stock went into its nosedive, costing Tenkman more than $900,000. She swears she doesn't blame her kids for making her wait. She'll make do on Social Security and dividends, she insists. She'll cut back on her travel plans. But the one thing she really regrets, she says, is that for now, she's had to stop giving Procter stock to the kids.

Plenty of others in Cincinnati are tightening their belts. Ed Givens, a former P&G engineer who turned 55 in March and retired that month, had just bought his dream house-a $445,000, four-bedroom colonial in an upscale neighborhood-where he hoped to pursue his love of organic gardening.

By the time the stock dropped, he'd already closed on his new home. "We went out on a limb with this house," says Givens. "We've had to scale back. Some rooms won't get furnished. We'll cut back on travel. We wanted to do some significant things in terms of gifting for our children, but we'll wait. I have to lower my expectations a little bit."

As a result of the stock drop, Givens's portfolio plunged from a high of $3.5 million to $2.1 million. Lucky for him, he'd taken about a third of his nest egg out of Procter stock.

Some had it even worse. Robert Laughlin, the chemical engineer, lost several million dollars; he hadn't yet diversified any of his nest egg. "We were in the middle of that process when the bottom fell out of the stock," he explains. Laughlin, who holds a Ph.D. from Cornell and is an expert in an area called surfactants, dreamt of funding a chair at Cornell in his research specialty, but the stock's drop has "thrown a monkey wrench into that." He had planned to fund the cost-some $2.5 million-with some of his retirement money. He's still doing it, but now he'll pay over time and it'll take a larger proportion of his wealth.

For every retiree who will make do, however grudgingly, on less money, there's another who is nothing less than devastated. Roy Randall Sr. had every penny of his retirement account in Procter stock. "We thought of it as a lifetime guarantee," says the 56-year-old former pipe fitter. "I felt it was very safe."

Randall had fulfilled one of his retirement dreams with a $30,000, 19-foot, 200-horsepower Ranger bass boat to fish the lakes of Tennessee, Ohio, and Kentucky. In January he put down another $40,000 for a GMC Yukon XL to haul the boat with. He even planned a 13-day cruise in Alaska for his wife and himself with two other Procter retirees and their spouses.

But then his nearly $2 million nest egg dwindled to less than $1 million. "For all the years I've been with Procter, there were flat spots in my career, but the stock always went up," he says. "You always had faith in the stock because you'd seen other people retire and not change their lifestyle. This is a first. There is nothing you can do. It was very disappointing."

He canceled the Alaska trip and decided to take shorter and fewer trips with the boat. For now, he's stopped cashing in any of the stock to fund his living expenses and is surviving on the returns of a small amount of money he set aside in mutual funds in his wife's name. "I can't take that big of a loss," he says. "I need that stock as income for the rest of my life."

If the stock doesn't rebound by year's end, he'll have to retire from his retirement. "We're watching our pennies. I really don't want to go back to work," says Randall, who doesn't understand how the company's managers couldn't have seen trouble coming. Lifetime guarantee? Randall doesn't believe that anymore. "P&G used to be a big family. You take care of them, they take care of you," he says. "Now it's a one-way street."

It's easy to see why the company inspired such loyalty. Ever since William Procter and James Gamble set up shop 163 years ago, using the grease and fat from Cincinnati's swine slaughterhouses to make candles and soap, P&G has been a major force in the city's growth. When the city-then known as "Porkopolis"-lost its standing as the pork-processing capital of the country, P&G was there, taking up the slack, hiring locals to make new products such as Dreft and, much later, Tide. During the Depression, its Ivorydale plant never shut down.

Yet at times the company's insular corporate culture verges on the paranoiac. When Wall Street Journal reporter Alecia Swasy wrote a series of stingingly critical articles on the company in 1991, P&G convinced Cincinnati police and the local prosecutor to obtain her phone records, thereby exposing all her sources for the story. SmartMoney's repeated requests for interviews with senior executives, including CEO Durk Jager, were declined. In fact, analysts say the appearance of P&G's chief executive is rare at investor meetings. Employees, likewise, talk to the media only grudgingly, often out of fear for their jobs. And the company's intranet warns employees not to speak to anyone about the shareholder lawsuits.

All of which makes it even more remarkable that so many formerly loyal employees-such as Wilbur Yellin, a 67-year-old retiree-are speaking out now. Yellin lost 30 percent of his portfolio, and, like so many others, puts the blame for the stock catastrophe squarely on the CEO's shoulders. "Management screwed up," he says bluntly.

Yellin, a former chemist, also finds it hard to believe that the company didn't know earlier about its earnings shortfall. "This surprised most of us who had been in middle management," he says. "We know Procter manages costs very closely to keep budgets in line. The concern is that there are a lot of young managers who aren't watching their Ps and Qs."

But what really rattles Yellin is this: Not only did March's earnings warning come out of the blue, it also seemed to follow reassurances that the company was doing okay. Yellin remembers reading upbeat comments from the CEO on the company's Web site only weeks earlier. "It sounds like the left hand didn't know what the right hand was doing," he says.

About Andrew Leckey

Andrew Leckey, nationally syndicated investment columnist for the Chicago Tribune Company, is also visiting professor in Business and Economics Journalism at Boston University’s College of Communication. He was previously a financial anchor on the CNBC cable television network, contributing editor of the Quicken.com financial web site, and director of the Business Reporting Program at the University of California, Berkeley. He has been author or editor of eight financial books. Leckey received the National Association of Investors Corporation’s Distinguished Service Award in Investment Education. He was a Knight-Bagehot Fellow in Economics and Business Journalism and a fellow of the Media Studies Center, both at Columbia University.

About Ken Auletta

Ken Auletta as been the "Annals of Communication" columnist for The New Yorker since 1992. He is the author of seven previous books, including three national bestsellers. In ranking him as America's premier media critic, the Columbia Journalism Review concluded, "No other reporter has covered the new communications revolution as thoroughly as has Auletta."He has written for various newspapers and magazines and appeared regularly as a television interviewer and analyst. He started writing for The New Yorker in 1977.He grew up in Coney Island and now lives in New York City with his wife and daughter.

Praise

Praise

“[The editors] cast their net wide, picking up some excellent stories from nontraditional sources that even avid readers of the business press may have missed.”–USA Today, on the 2001 edition

The Best Business Stories of the Year: 2002 Edition by edited by Andrew Leckey and Ken Auletta